SCOTUS Clarifies Rules for Bad-Faith Sanctions

(CN) — The Supreme Court on Tuesday ruled that when federal courts sanction a bad-faith a party in a lawsuit, the award given to the other side must be limited to the fees they incurred solely because of the misconduct.

The case came to court from the Ninth Circuit. As recounted in the ruling written by Justice Elena Kagan, Leroy, Donna, Barry and Suzanne Haeger were injured in 2003 when one of the Goodyear tires on their motor home failed, causing their vehicle to swerve off the road and flip over.

The Haegers sued Goodyear two years later, in a case that was removed to federal court.

After several years of contentious discovery, marked by Goodyear’s slow response to repeated requests for internal test results of the G159 tire the Haegers used their motor home, the parties settled the case.

Later, the Haegers’ lawyer learned that, in another lawsuit involving the G159, Goodyear had disclosed test results indicating that the tire got unusually hot at highway speeds. eventually Goodyear conceded withholding the information from the Haegers, even though they had requested all testing data.

The Haegers then sought sanctions for discovery fraud, urging that Goodyear’s misconduct entitled them to attorney’s fees and costs expended in the litigation.

A federal judge found Goodyear had engaged in an extended course of misconduct, and awarded the Haegers $2.7 million — representing what they spent from the moment Goodyear made its first dishonest discovery response.

In handing down the sanction, the judge acknowledged that typically sanctions for misconduct must be limited to the amount of legal fees caused by that misconduct.

But the judge went on to say that in cases of particularly egregious behavior, a court can award a party all of the attorney’s fees incurred in a case, without any need to find a “causal link between the expenses and the sanctionable conduct.”

In this case, the court concluded Goodyear would have settled the case much earlier than it did if it had produced the requested documents.

But the judge also acknowledged that on appeal the Ninth Circuit might require a link between the misconduct and the harm caused when calculating the sanction award.

In the event it did, the judge also made a contingent award of $2 million, reflecting a deduction of $700,000 in fees the family incurred developing claims against other defendants and asserting their claims for medical damages.

Goodyear appealed, but the Ninth Circuit upheld the original $2.7 million award, finding the district court did not abuse its discretion in imposing the sanctions.

Goodyear and one of its attorneys in the case petitioned the Supreme Court for a writ of certiorari.

“The [Ninth Circuit] majority’s approach disregards the safeguards engrafted on inherent authority sanctions to restrain the unfettered exercise of a court’s inherent authority,” the petition states. “This case presents an ideal vehicle for this Court to examine and clarify the standards that govern the imposition of civil sanctions under inherent powers, particularly in light of how the majority and dissent framed the issue at hand.”

In her ruling for the unanimous court (new Justice Neil Gorsuch did not participate in the decision), Justice Kagan said, “[a] sanctioning court must determine which fees were incurred because of, and solely because of, the misconduct at issue, and no such finding lies behind the $2.7 million award made and affirmed” by the Ninth Circuit

“Nor is this Court inclined to fill in the gap, as the Haegers urge,” Kagan continued. “As an initial matter, the Haegers have not shown that this litigation would have settled as soon as Goodyear divulged the heat-test results (a showing that would justify an all-fees award from the moment Goodyear was supposed to disclose).

“Further, they cannot demonstrate that Goodyear’s non-disclosure so permeated the suit as to make that misconduct a but-for cause of every subsequent legal expense, totaling the full $2.7 million,” she wrote.

While Kagan and her fellow justices acknowledged the district court considered causation in arriving at its back-up award, the court said it is unclear whether the trial courts understanding of the causation corresponded to the appropriate standard.

She said that uncertainty pointed toward throwing out the fee award and instructing the trial court to consider the matter anew.

The justices did not take up a claim by the Haegers that Goodyear waived any ability to challenge the contingent award since the $2 million sum reflects Goodyear’s own submission that only about $700,000 of the fees sought would have been incurred regardless of the company’s behavior.

Kagan said since the Ninth Circuit didn’t address that issue, it would be wrong for the Supreme Court to tackle it in the first instance.

“The possibility of waiver should therefore be the initial order of business on remand,” Kagan wrote.